Cyprus is situated in the north-eastern basin of the Mediterranean Sea at the crossroads of three continents: Europe, Asia and Africa. It is 65 km south of Turkey, 96 km west of Syria, 328 km west of Israel, 385 km north of Egypt, 980 km south-east of Athens. The strategic location of the island has played an important role in its continuing development into a financial centre. With an area of 9.251 sq km, Cyprus is the third largest island in the Mediterranean after Sicily and Sardinia.
The estimated population of Cyprus is 820.000. Greek Cypriots, form by far the largest ethnic group, accounting for almost 80 percent of the population. Turkish Cypriots, British, Armenians, Maronites and other ethnic groups make up the remaining 20 percent.
Cyprus has a long and varied history. It was settled by the Greeks in about 1200 BC. Its strategic position made it an object of contest among the great powers ruling the world at different time periods. As a result, the island was occupied through the ages by many different races the main ones being the Egyptians, Romans, Byzantines, Francs, Venetians, Turks and British. Each one of these people, in its own way, left its mark on the island but the Greek character of the island remains predominant. The British, who were the last to control Cyprus before the island eventually became an independent sovereign republic in 1960, have left their mark on commerce, law, public administration and business life in general, all of which have developed along the British model. Cyprus joined the EU on 1 May 2004.
Political and social environment
Cyprus is an independent and sovereign Republic with a presidential system of government. The elected President of the Republic is the Head of State and takes precedence over all persons in the Republic. His term of office is set for a five-year period but he may be re-elected for an unlimited number of terms.
Legislative power lies in the hands of the House of Representatives, the members of which hold office for a period of five years.
The Cyprus legal system has been structured on its English counterpart. English case law is closely followed and all statutes regulating business matters and procedures are based essentially on English laws.
Cypriots have earned themselves a reputation as a hardworking and industrious people with a flair for business. Tradition and family ties are still strong in what is also a liberal and pluralistic society. There is a high standard of education on the island, which has one of the highest percentages of university graduates in the world. Most professional and academic qualifications are gained either at the local University or Colleges, but mostly at EU and American universities. Cypriots enjoy a high standard of living. As an example, around 70 percent of homes are owner occupied, and there are no records of homelessness. The crime rate is low on the island, making Cyprus an ideal location to visit and live.
Non-EU individuals wishing to retire in Cyprus are granted a residence permit provided they can satisfy the authorities that they have enough income from abroad to support them during their retirement in Cyprus.
Cyprus and the EU
The Republic of Cyprus is a member of the European Union as from 1 May 2004. The accession of Cyprus in the EU and the adoption of the acquis communittaire have given rise to new challenges and opportunities in the business world in Cyprus. Moreover, a number of new funding opportunities became available from EU funds aiming mainly to support the development of business activities in the area of manufacturing, agriculture and agrotourism as well as the promotion of human resource development and the development of the rural areas of the island.
Cyprus has recently entered the European Exchange Mechanism (ERMII). The Government of Cyprus has already announced the implementation of a strategic plan for the preparation of the introduction of the Euro. Businesses in Cyprus are now faced with the challenge to take all necessary action needed to ensure their smooth adaptation to the Euro.
The services sector has become increasingly important as indicated by its almost 70 percent contribution to GDP and its share in employment, while the importance of agriculture and manufacturing is declining steadily.
Services include banking and financial services, insurance, advertising, legal, architecture and civil engineering, accounting and auditing, consultancy, design, electrical and mechanical engineering, film production, market research, medical, printing and publishing, public relations, education, software development, tourism and related services, telecommunications, transportation and other services. The size and rate of growth of this sector, which has been the fastest in recent years, has led observers to call Cyprus a "service economy"
- services including tourism 63%
- manufacturing 9%
- transport and communications 9%
- construction 8%
- agriculture 4%
- other 7%
Cyprus as a financial centre
Having as from 1 January 2003 amended its tax legislation in anticipation of EU accession, Cyprus has set-up a tax system which is ideally suited both to inbound and outbound EU investors. It resulted in aligning Cyprus with EU directives, abolished all distinctions between international business (formerly "offshore") and local companies as from 1 January 2003 whilst maintaining a favourable tax regime for the international investor that include the following provisions:
- corporate profits are taxed at 10%
- investment income from dividends is tax free (0%)
- profit on sale of shares and securities is tax free (0%)
- repatriation of profits from Cyprus companies - dividends, royalties, interest - to non-residents is tax free (0%)
- no time restrictions on carrying forward tax losses
- group relief provisions
- no CFC rules applied
The island's 34 double tax treaties remain in force and continue to offer ample opportunities for international tax planning whilst also reducing legally overall taxes for businesses and individuals.
Cyprus has double tax treaties in force with the following countries:
Austria, Belarus, Belgium, Bulgaria, Canada, China, Czech Republic, Denmark, Egypt, France, Germany, Greece, Hungary, India, Ireland, Italy, Kuwait, Malta, Mauritius, Norway, Poland, Romania, Russia, Singapore, Slovakia, South Africa, Sweden, Syria, South Africa, Thailand, United Kingdom, United States, USSR and Yugoslavia.
Cyprus is most commonly used as an intermediate holding company jurisdiction and is of particular interest in the following circumstances:
- for groups international or domestic investing outside Cyprus, aiming at dividend income streams. Such dividend in most cases will be tax exempt in Cyprus
- to hold subsidiaries that have scope for significant capital appreciation and that may be spun off or sold in the future. Such disposals are not taxable in Cyprus
- to benefit from the favourable withholding tax provisions of the Cyprus double tax treaties network and the EU parent-subsidiary directive and the other directives
- where a jurisdiction is required that does not have controlled foreign company legislation
- where it may be important to achieve a tax free unwind of the holding company at some stage in the future
- to avail of the easy exit strategy under Cyprus law which allows payment of dividend, interest and royalties (in most cases) without payment of withholding tax
- appropriate for any fund or investment vehicle, as there is no tax on transactions in securities as defined, even if this is the trading activity of the entity
Double Tax Treaties
Paid to Cyprus
The above table provides a summary of the withholding taxes applicable for payments to Cyprus companies from double tax treaty countries.
Negotiations are currently in process for the conclusion of double tax treaties with Estonia, Latvia, Lithuania, Spain, the Netherlands, San Marino, Sri Lanka and Iran.
Paid from Cyprus
No withholding taxes exist for dividend payments which are made to non-tax residents of Cyprus.
InterestNo withholding taxes exist for interest payments which are made to non-tax residents of Cyprus.
No withholding taxes are levied on royalties as long as the right is used outside Cyprus.
Cyprus Post-EU AccessionAs from 1 January 2003 Cyprus has set - up a tax system which is ideally suited both to inbound and outbound EU investors. The new tax climate offers to the investors.
- low taxation
- extensive double tax treaties network
- exemption from tax in most cases on dividends received
- exemption from tax of profit from sale of shares and securities
- exemption from withholding tax on the repatriation of income either of
- dividends, interest and on royalties
- access to EU directives
Tax costs play a significant role in investment decisions. Investors aim in maximising after-tax return on investment. Therefore, investment structures which have the least tax leakage are preferred by investors and are recommended by the advisers.
As such, a Cyprus investment vehicle can collect income which is a charge against high tax income. Withholding tax is eliminated or reduced under double tax treaties or under EU directives. The rate of tax in Cyprus is low compared to other EU countries. The income can then be repatriated in any form the investor wishes without withholding tax.
This investment vehicle is suitable both for EU inbound and outbound investments. There are no investment activities which are inappropriate for the Cyprus tax environment. However, there are investment activities which are indeed ideally suited to the Cyprus tax environment such as:
- investment funds
- finance companies
- royalty companies
- south Europe, Middle East, Russia, central and eastern Europe headquarter business activities
European enlargement and the accession of Cyprus opens up a new gate to investors who wish to invest in EU or who wish to invest from the EU.